What is economics and why do we care about it? The economy is what we do and why we do it. Reality introduces scarcity to that equation, and competition results. Our desires and values translate into actions, and competition translates those actions into strategies and compromises. Economics is a question of how we do what we choose to do, and how our way of doing things evolves. We all want what we want, but what’s our praxeology? More importantly, how do we improve it? That’s what economics seeks to answer.
I have previously asked whether capitalism, thought of as an engine, might yet receive an upgrade for the twenty-first century. If capitalism is an economic operating system, what is it managing? What is the freedom we hope to obtain through capitalism? Economics provides an answer.
Conventional academic economics relies on the neoclassical model, which uses an abstract concept of utility. Utility is a continuous quantity, like a tank of gas, abstracting the sum of everything that’s considered valuable to people. Since utility is a uniform, universal value, the mathematics of equilibrium can be applied to it.
The main drawback of neoclassical economics is that its framework constrains analysis. It primarily works for situations where all value derived from goods and services can be quantified in the abstract, as interchangeable utility. This mode of analysis works for businesses, which measure their success in terms of money, where any dollar is interchangeable for any other. It’s not as useful for human economics, where a person’s or group’s hierarchy of preferences includes trade-offs that fundamentally alter their priorities depending on whether they have access to one set of choices or another.
Trade-offs create different sets of priorities. For example, if a person meets the love of their life, they may start a family. If, as fortune would have it, they do not find love, then they will face a completely different set of possible career priorities. There’s no room for abstracted, universalized utility here.
A more salient mode of economic analysis comes from the Austrian School. Early economists such as Carl Menger, Jean-Baptiste Say, and Ludwig von Mises promoted the concept of subjective preference hierarchies. Humans do not experience general utility. We have a hierarchy of needs and wants. It is a discrete function, counted one at a time. It’s a matter of rigid trade-offs and high complexity.
The subjective basis of economic value better suits newer theories of business strategy which depend on game theory to generate meaningful conclusions out of the interlocking trade-offs faced by market participants. Consider the basic logic of game theory; it’s about who can afford to walk away, and who can’t. This defines who has power, and through power one derives a greater claim over scarce resources. A player with the smallest advantage can end up owning the whole game if that advantage becomes essential.
The concept of subjective, ranked value speaks to another truth of human economics. A product, tool or asset has no intrinsic value. Everything into which economic value is added, through labor, merely represents a value proposition. The value which an actively used tool or asset can provide represents the value of that item in the moment of use. This is because a human being’s needs change throughout the day and with the passage of time. Economics shouldn’t be structured as an equilibrium problem, but rather as a game with trade-offs and variable opportunities to cooperate or compete. Consider this dynamic within the economy if it were to be described as a technological system.
The human economic actor possesses limbs, mobility, and a mind. Economic activity is the employment of mind and mobility, the manipulation of matter with limbs and digits, to gather and organize resources. In essence, humans are knowledge machines, who configure systems of materials and energy while learning ever more sophisticated ways of doing so.
What an individual man can’t build, organize, or invent himself must be produced through a division of labor. This entails social organization. There must be a division of tasks and a distribution of gains. The tools which lay down these divisions and govern human economic cooperation are social technologies. With labor specialization leading to technological development, the division of labor can be interpreted as a meta-technology which enables discovery.
Any organized group of economic actors will need some cooperative basis for their division of labor. There needs to be a process for assigning tasks. There will have to be some system for paying individuals out of the common pool of realized value. Usually, a way to enforce rules. These dynamics can be described using cooperative game theory.
If people have a chance to cooperate, they will do so only if cooperation produces more value than non-cooperation. There would be no division of labor if people didn’t benefit from it. It’s not only a matter of the group performing better through cooperation, each individual also has to receive a greater personal benefit when the group’s product is distributed. Highly skilled group members may need to be paid unequally, yet the group will form as long as the lowest paid member makes more money from the group than from going alone. If competitive game theory is about who has the power to walk away, cooperative game theory is about what causes people to show up.
In this light, when we talk about economic systems, what we really mean are the social technologies which manage the economic game. The processes that enable division of labor by managing how coalition pay-out occurs. This could be something as simple as market prices for certain skill sets in a labor market with money, or something equally mundane: the contracted positions and their salaries within a corporate firm. A firm’s management and salary structure is just the solution to a cooperative game.
From the point of view of economics, does freedom require absolute individualism? No. Humans have ranked preferences, and they cooperate on the basis that they get more out of it than they lose. That is, when an individual chooses to join a group, they gain more in their higher ranked preferences, and they lose most in their lower ranked preferences. This logic can even describe a tribal style of social organization, one which can be generalized for membership in any sort of political society.
When a person belongs to a tribe, they may have to give up certain rights. There may be rules, and there may even be obligations. However, in theory, willing tribal affiliation implies that much is gained from membership. Perhaps safety and protection, maybe access to work. The problem comes from situations where people are forced into obligations or restrictions. Freedom should be understood in this light. Political arrangements must derive from consent and mutual benefit. That includes joining a company as an employee.
Cooperative game theory and Austrian economics show us how the politics of liberty derive from economic considerations. Social interactions are defined by overlapping rules and obligations, including for example rules prohibiting theft and murder. The key is that we fight to preserve our right to consent to these rules.
We deserve to choose to lose certain benefits if our obligations become too heavy. However, we should actively agree to rules and obligations when it serves our primary interests as individuals. Freedom lovers shouldn’t have to live isolated lives. Some of the benefits which come from associations with larger social groups are worth making compromises for. A free society is one which is broadly open about negotiating these benefits and obligations.
Political ideology contrasts with the freedom perspective. The purpose of ideology is to invent some imaginary benefit—an afterlife, or a vague utopia over the horizon—and then leverage that to exploit people. To take more from people than what is given, in the name of a perceived but unobtainable benefit. That’s a poor model for society. The cooperative economic model for social compromise is pragmatic and realistic.
Rationalists and modernists have used ideology to define the oughts of life, then demand obedience from the masses. Yet, philosophy has consistently failed to provide an objective basis for life’s oughts. We express our desires subjectively, and find common cause through discourse and compromise, not the institution of expert, settled reason.
The nihilism of the late enlightenment put up the institution of reason for sale to the highest bidder. Since then, it has been used almost exclusively to enrich and protect elite classes and further their political aims. Some have called this the Cathedral, and others, more aptly in my opinion, the Ziggurat. This is the modern so-called ‘liberal’ West. Here, liberalism has no meaning and is merely a weapon against political upstarts which threaten the Ziggurat.
There are no experts who can define life’s meaning or enforce the path toward achieving it.
The economy itself is the most perfect agent for realizing life’s meaning. The economy reflects the outcome of humans asserting subjective preference through action. Life’s meaning, the answer coming necessarily from each of us individually, manifests through economic activity. This isn’t just a material concession. Economic activity produces art and literature, even theology and prophecy; the labor of humans constrained by space and time, who never lived completely free of the need for food and shelter. The wrinkles and imperfections of life are material and crass but there is also its beauty. Diogenes and Siddhartha alike were economic actors.
This is our aspiration in studying economics: to realize that golden economy which, among the wrinkles of a deeply imperfect world, permits us to find meaning and pursue it to the greatest realistic end. Capitalism should be a machine that enables the subjective preferences of all to be well realized without anyone’s needs seriously encroaching upon anyone else’s. This does presume abundance, but not a world free of constraint or without inequality. We desire a world where, with all our diversity, each of our most important values lies within our reach, while our need to compromise is soft and bearable.
I would call this liberty. It is a technological outcome. It is not the ideological establishment of certain values. It’s making room for each of us individually to have as few constraints on our preferences and values as possible. It’s a well-structured economy that permits easy compromise through agile and efficient use of resources.
Freedom lovers can’t expect a world free of constraints. However, the ideal of liberty asks us to only make compromises when they are necessary, permitting us the freedom to prioritize what we individually define as most valuable. We need good economic and social technology to show us what constraints we face realistically, so we can endure them consciously. That should be the purpose of our engine of capitalism.
